Singapore’s position as one of the world’s leading oil trading hubs is coming under threat from the many court cases stemming from the collapse last year of Hin Leong Trading.
Singapore is where many refineries’ trading and procurement arms, trading houses, including oil majors are based.
A vibrant oil industry has also created business opportunities for banks and insurers which provide the needed support to sustain a dynamic oil trading environment.
The fallout from the collapse of Hin Leong, the Singapore-based oil trading powerhouse, is causing severe ruptures in the local oil scene.
The legal action is quietly causing mayhem in the republic’s oil trading and shipping community
Banks, which lent billions of dollars to Hin Leong, are now using the Singapore courts to recoup their losses.
The banks’ actions are not just against the bankrupt trader but against the multitude of shipowners, traders, and cargo owners unconnected to events at Hin Leong but who are now caught up in the nightmare of the spectacular collapse by dint of participating in the bunker markets.
The legal action is quietly causing mayhem in the republic’s oil trading and shipping community and if it goes unchecked, could eventually lead to a breakdown in the delicate ecosystem of transactions based on trust built up over decades between banks, shipowners, traders and suppliers.
There are currently several cases before the Singapore courts involving claims associated with Original Bills of Lading (OBLs), Letters of Credit (LCs) and Letters of Indemnity (LOIs).
These three documents are intricately connected to one another and to anyone well versed in the oil industry, the role of LOIs which are commonly used in lieu of an OBL to ensure timely payments and cargo discharge between the various parties in oil sale and purchase is now being questioned by these court cases.
The litigation involves banks including United Overseas Bank and Oversea-Chinese Banking Corporation, ING, Standard Chartered Bank as well as some of the best-known names in international shipping such as Navig8, Maersk and Scorpio.
Many oil companies, including national oil companies, oil majors and smaller trading companies have also been dragged into the controversial legal actions. Each are represented by some of Singapore’s leading law firms.
On the face of it, when an oil trade transaction is unwrapped and the different segments seen in isolation, it looks correct that an LC issuing bank, when in possession of the OBL, can legitimately go after a carrier under the guise of an alleged misdelivery.
But what lies behind the banks’ litigation is very different to this principle. The buyer’s banks who issued LCs to a seller are now attempting to overturn the underlying principle and over-stepping its primary role of why companies use an LC as a trade credit collateral in the first place.
The main point behind an LC and why a bank issues such a letter to the seller is because it promises to shoulder the non-payment risk of a buyer.
However, what is happening before the Singapore courts now is that the LC issuing banks are seeking any way to recover amounts due from the other parties in the transaction flow after they have failed to obtain payment from Hin Leong as the buyer.
Secondly, it appears that by breaking the transaction chain into different segments whereby the court may simply disregard how the bank has come to obtain the OBL such as in exchange of a seller redeeming its LC LOI, the LC issuing banks holding the OBL and knowing the cargo has been discharged, are now turning to the carriers with threats of misdelivery and vessel arrest.
The unfortunate players in such litigation cases are the carriers – the shipowners – who have little choice but to pass the buck back to the seller, which in many cases have provided the shipowner a shipping LOI – an indemnity issued by the seller to the shipowner for release of cargo without OBL, which is a common practice in the oil industry – in order to ensure timely discharge of cargo.
This situation has been developing for almost one year since news of the Hin Leong collapse broke. Many sellers now find themselves engulfed by litigation and vast claims against them even though they have nothing to do with the Hin Leong case.
Dozens of bone fide sellers are facing claims from carriers and face losing their cargo at the same time, while the LC issuing banks, should they succeed in their litigation claims, will be freed from shouldering the non-payment risk of the buyer.
As the litigation rumbles on, there is growing concern among traders and shipowners alike and the question is being asked more loudly each day on what the the role of an LC issuing bank really is.
It has led to deep concern in the Singapore oil trading community many of whom are now questioning the whole purpose of having a bank to step in between a seller and buyer by issuing an LC in the first place.
Banks, when acting as an LC issuing bank and facing the non-payment from a buyer, are taking full advantage of the law protecting the full set of OBL holders to claim against carriers for payment.
“To ensure all parties have an equal fighting chance and justice is done, it is imperative for the Singapore courts to look beyond what is merely presented, scrutinise the sequence of events in the whole transaction flow and ask the fundamental question of whether the LC issuing banks should shoulder the credit losses in such cases when the buyer defaults,” one local bunkering source told Splash on condition of anonymity.